MS. DIANE REHMThanks for joining us. I'm Diane Rehm. There is no panic, but there is a fear among investors that politicians, both here and abroad, will fail to make the kinds of compromises our financial challenges demand. Protracted political debate over raising the debt ceiling in the U.S. and containing the debt crisis in Europe both had layers of risk to already difficult situations. Joining me here in the studio to talk about the global economy and the price we pay for partisan politics, Damian Paletta.

MS. DIANE REHMHe's a reporter with The Wall Street Journal. Scheherazade Rehman, she is professor at George Washington University. Joining us from a studio at NPR in New York City, William Cohan. He is former investment banker and a columnist for Bloomberg View. Do join us, 800-433-8850. Send us your email to drshow@wamu.org. Join us on Facebook or Twitter. Good morning to all of you.

MR. DAMIAN PALETTAGood morning.

PROF. SCHEHERAZADE REHMANGood morning.

MR. WILLIAM COHANGood morning.

REHMDamian, let me start with you. Wall Street Journal poll out yesterday shows people are saying to Congress, enough already, get something done. What's going on right now?

PALETTAWell, it's truly interesting. We've seen so much mudslinging in the last few weeks between Democrats and Republicans, and it really looked like it was going to be hard to get a compromise on a deal to reduce the deficit over the next 10 years, which they think is needed to raise the debt ceiling. And so yesterday, there was this sort of surprising meeting in the morning. More than 50 senators from both parties showed up.

PALETTAAnd people came out, you know, hand in hand. And it was almost like an episode of "The Twilight Zone," you know. Who are all these people? Why are they all agreeing with each other? And why are they all rallying behind this deal that would, you know, raise taxes by a trillion dollars over 10 years? It would reduce the deficit by close to $4 trillion over 10 years.

PALETTAAnd it had -- this is something that the White House's deficit commission by Erskine Bowles and Alan Simpson had pretty much pushed last year. So it is the 11th-hour, as President Obama said. But it did seem like, yesterday, that everyone wanted to be able to come together. Everyone wanted to be able to get behind something 'cause they realize that the political pressure on them to get a deal here is immense.

REHMSo why do you think they all showed up together this way, striking what seemed to be a kind of unity that surely hadn't been there last week?

PALETTAThat's a great question. And the lawmakers I talked to -- I talked to Joe Lieberman, for example, the independent from Connecticut, and he told me that, quite frankly, he felt like it was embarrassing the way that they were acting, that they won't be -- they weren't able to, you know, talk to the American people. They knew what the American people wanted. They wanted some sort of compromise.

PALETTAAnd like you mentioned, our poll -- the American people have really shifted in the last few weeks. They -- you know, they say, enough is enough. We don't want the consequences of a default here. And so, I think, Congress is getting the message that they have to get something done.

REHMHow much pressure does the endorsement of President Obama put on to Republicans, especially Eric Cantor?

PALETTAI think an enormous amount of pressure. And, you know, what we really saw -- you know, I think when the public saw this proposal come out and all the bipartisan support, it got -- raised a lot of eyebrows. But then the president rushed to the microphones and pretty much said, I'm in, let's do it. The stock market jumped 200 points when -- you know, when he came out and made that statement.

PALETTAThat had the effect of essentially isolating the House Republicans who had been kind of driving this proposal that did not, you know, want to have as many compromises in it. And, quite frankly, the House Republicans yesterday, including Congressman Cantor, said, you know, this is interesting. We'll take a look. There is some good stuff in here, too. So some of the ice began to break yesterday.

PALETTAWe are getting down to the wire here, but some things are definitely in motion.

REHMDamian Paletta, reporter for The Wall Street Journal. Turning to you, William Cohan, it looked as though, as Damian said, investors were somewhat heartened. What are they looking for?

COHANWell, Diane, I think part of the problem here is that you have a stock market which goes up 200-plus points yesterday, well into 12,000-plus territory, up from something like 6,500 back in the depths of February 2009. So, you know, in two-plus years on, people say, hey, you know, I'm feeling pretty good. The stock market is up. What could possibly be going wrong here? Why is anybody worried?

COHANWell, I think that the stock market is precisely the wrong way to -- the wrong market to be looking at here. What people should be looking at and worried about is the bond market. And the bond market is a very complicated market, much, much bigger than stock market that very few investors and people generally understand.

COHANA part of the problem that we had during the financial crisis was problems in the bond market, problems in the mortgage-backed securities market, as you and I have discussed previously.

REHMIndeed.

COHANAnd what's going on here now, this past week, is that bond investors, people who, you know, worry for a living essentially, are not waiting to see whether politicians can get their proverbial acts together, politicians who seem particularly nonchalant about this looming deadline and are worried that, actually, the U.S. will default and are taking protective actions, and so bond prices have rallied incredibly when the crisis was at its most acute in 2008, in September and October of 2008.

COHANYou will remember that the bond yields on treasury securities -- or maybe you won't remember. But bond yields on treasury securities were negative. In other words, bond investors were willing to pay, in effect, the government to hold their cash because they thought that would be the safest place to go. That was such a rare occurrence that Warren Buffet, the great investor, you know, flashed a slide of a Bloomberg screen showing negative treasury yields up on the screen during his annual stockholders meeting

COHANBut back -- we're back to those days again. This past week, really short-term treasuries, less than three months, are now yielding in negative territory again. The whole treasury curve is basically yielding close to zero, which basically means that investors are saying, I want security, I want safety, and I don't trust what's going on in Washington or in Europe.

REHMDo you think that those bond holders and bond investors were heartened by yesterday's actions?

COHANWell, I think that the bond market, again, yesterday, rallied again, which means that, once again, yields went even lower and prices went up, which, you know, it's a very ironic thing going on here, Diane. On the one hand, you know, with a looming default on payments from the U.S. government -- something that's never happened before -- that Aug. 2 deadline is looming.

COHANThat means that the U.S. government could potentially default on its debts for the first time. That hardly makes the U.S. government a good investment. And that's why S&P and Moody's have indicated that they are potentially going to downgrade the securities of the U.S. government. At the same time that that is happening, which is hardly a bullish sign for investors -- bond investors, you know, the bond market has decided that it needs to rally.

COHANAnd people have flocked to it because, you know, they're basically out of choices. Where -- if I'm a bond investor, were am I going to invest?

REHMRight.

COHANI can't invest in Europe because they've got economic problems. And the U.S., you would think that -- basically, they're betting that the U.S. will never default on Aug. 2. And that may, in fact, be a good bet. We'll have to see.

REHMWilliam Cohan. He is former investment banker and now Bloomberg View columnist. He is author of "Money and Power: How Goldman Sachs Came to Rule the World." And turning to you, Scheherazade Rehman, there is an emergency meeting tomorrow for eurozone leaders. Tell us what's happening there.

REHMANWell, I think is one of the many emergency meetings they have been having over the last 14 months. The European drama is all about whether they can get a bailout package for Greece, again, in some coherent fashion. But let's step back for one second. This European drama that's been unfolding for over a year, first it was Greece, then Ireland, then Portugal, then we flirted with Spain, back to Greece, Ireland.

REHMANAnd now we are hitting the shores of Italy. And it's become quite, I would say, damaging. The mantra of the day is, be very afraid. But don't panic just yet. There is absolutely no room for slippage at this meeting in terms of coming together with a coherent package.

REHMWhat do you mean no room for slipping?

REHMANA slipping means much of the same old reactions that the European governments have had, meaning denial, dithering, confusion, indecisiveness and always an 11th-hour deal, which is exactly what tomorrow is going to bring with a half-baked rescue package, which is basically pushing the problem down the road as opposed to solving it.

REHMBut the IMF warned that European nations need deeper integration, economic integration to withstand this debt crisis. Is that likely to come out of this meeting?

REHMANI think this is a fundamental question that the European governments are posing to themselves. Whether this -- they have monetary integration. What they do not have is fiscal integration. And there's a fundamental contradiction here. They want to avoid a default in the eurozone and especially with Greece at all cost because it shows failure for their grand project.

REHMANBut at the same time, they are trying to avoid any open-ended transfers of wealth from rich European taxpayers to the poor European countries. This is a very tall order to do.

REHMSo this is where Germany comes in and retains some measure of control and resistance?

REHMANAbsolutely. And you can't blame them. But don't forget the French are equally exposed. You know, we -- has been flirting with Italy, you know, ebbing on the crisis. The French banks have a $400 billion exposure in Italy.

REHMScheherazade Rehman, professor of International Business and Finance at George Washington University. Short break. We'll be right back.

REHMAnd I know that this is a topic that interests a great many of you. The lines are filled. However, we'll continue our discussion for just a few moments with Scheherazade Rehman of George Washington University, William Cohan, a former investment banker, now with Bloomberg View as a columnist, and Damian Paletta, reporter for The Wall Street Journal.

REHMDuring the break, Damian, you were saying that, up until now, the stock market hasn't really paid all that much attention. But now, here in this country, and you, Scheherazade, have said, in Europe, people are saying, what is going on there in Washington? Why can't we get something done?

PALETTAThat's right. The debt ceiling has been raised dozens of times in the last few decades. And so whenever this issue comes up, there's all this posturing in Washington and a lot of eye-rolling from investors and from Wall Street. But the fact that this has really come down to the wire, I think, is finally starting to scare people because the repercussions of a potential default...

REHMAre huge.

PALETTARight -- are horrific and would be felt by Americans and people all over the world. So just in the last few days, we're seeing markets start to be a lot more sensitive. It's almost like during the financial crisis, where they're paying a lot more attention to what is going on in Washington and what policymakers are saying and reacting kind of in a knee-jerk fashion.

REHMScheherazade, connect for us the dots between what's happening in Europe and what's happening here in Washington, how the two intersect.

REHMANI think that what we have created is a very dangerous situation. From the Obama administration, we are hearing calamity will befall us if we do not raise the debt ceiling. And, of course, we know this is somewhat political posturing. The Republicans are losing the perception game, I believe. I think I agree with all the other callers that I think we will come up with some kind of deal before the deadline.

REHMANBut it has made the markets extremely jittery at a time where Europe -- a debt crisis, a sovereign debt crisis, is unfolding at very rapid speeds, very unpredictable. Like I mentioned earlier, that Italy got hit, and Italy really is too big to bail out, i.e. too big to fail. And anything happening there will come right back into our markets.

REHMWhat does it mean to have Italy as too big to fail?

REHMANWhat it means is that the Europeans don't have the money to bail Italy out, pure and simple. And I think investors on both sides of the Atlantic are in just disbelief of the political posturing going on on both sides.

REHMBut is there a similar political stalemate on the other side of the ocean, as there is here?

REHMANI believe so, and it's different issues, but essentially the same kind of posturing going on between parties and countries with different points of view over what the Union stands for and what should occur in the eurozone. And I think even the European Central Bank, which is supposed to be the big stable entity looking after the eurozone, is in contradiction with itself. It's in contradiction with the IMF, creating even more confusion in the markets.

REHMANProbably the only sane voice that I'm hearing in the last week is the Federal Reserve. After the mistakes that they made over the 2008 -- prior to that -- the last financial crisis, they're actually talking about another easing because they see the dangers in the market. A jittery market is a fearful market. A fearful market is a dangerous one.

REHMWilliam Cohan, what about another easing, as suggested by Federal Reserve Chair Ben Bernanke?

COHANWell, I think that, you know, easing has really pushed down short-term interest rates and medium-term interest rates. The idea, of course, is that freer money, less costly money will encourage economic activity, encourage borrowing, encourage lending, encourage people to build plant equipment and hire new workers.

COHANYou know, I seriously have my doubts about this because, A, it doesn't seem to be working because we're now through QE2, and that -- and, you know, unemployment is as high as it's been. Corporations in this country have something like $2 trillion of cash on their balance sheet. I noticed that Cisco, yesterday, announced that it was firing -- laying off something like 6,000 workers.

COHANCisco has something like -- I could get this wrong, but something like $40 billion of cash on their balance sheet. So they don't need any more liquidity. They need more demand for their products. That's why people are -- firms are not hiring. And, you know, you're seeing this very sluggishness in unemployment and rate of hiring. I did also want to just re-emphasize something that both Damian and Scheherazade said.

COHANAnd I think that the fear of all this is, I hope, beginning to get some traction with politicians on both sides of the aisle in Washington and in Europe. I mean, talk about the Federal Reserve.

COHANOne thing the Federal Reserve -- the New York Federal Reserve -- has been doing this past week is quietly -- it's an open secret on Wall Street -- but quietly telling money market funds, those funds where people put their short-term investments and they hope will be safe, to reduce their exposure to euro bank -- you know, European banks and euro dollar investments because they're so concerned about the potential struggles in those markets.

COHANBecause the New York Fed no longer believes that it can rescue a money market fund, as it did in September of 2008 when it rescued the reserve fund because of new provisions in the Dodd-Frank law. And this is, you know, hugely important and a very important message. If the New York Fed is worried about this, then we all need to be worried about this.

COHANAnd don't forget, U.S. Treasury securities are used as collateral in transactions all around the world. If there's a default on U.S. Treasury securities and U.S. Treasury securities are no longer considered good collateral for transactions all around the world, then we are in total chaos. And I think that's what the bond market is telegraphing, both at the end of last week and the beginning of this week.

REHMBut there are still a number of people in Congress, Damian, who don't believe these dire warnings.

PALETTAThat's right. You know, one of the things about this is we've never been in this situation, you know, in modern history, where the U.S. has defaulted on its debt. So it's -- who knows what would happen? I think what everyone is expecting, though -- or at least what the administration is expecting -- is that the sort of domino effect of consequences would be incredible and make the financial crisis of 2008 and 2009 look small in comparison.

PALETTAYou know, for example, the White House's budget chief on Sunday used the word Armageddon three times to talk about what would happen if they didn't get the debt ceiling done. So, you know, they're really worried about the consequences.

REHMSo give us a sense of the members on both sides of the aisle and how they are gearing up for this next portion of the battle.

PALETTAWell, yesterday, the House Republicans passed a kind of a symbolic measure that would cut spending, cut future spending and also require a balanced budget amendment to the Constitution. There is no Democratic support for it, but, you know, it was sort of seen as the last symbolic measure, potentially, before both sides engage in a final compromise.

PALETTAThe White House has been a lot less dug in, in the last week or so, and is really looking for any big deal to get through so that they can raise the debt ceiling, get this behind them and take this uncertainty out of financial and capital markets. And I think the Democrats in Congress have been pretty much willing to go along with the White House, although there's -- you know, some of the more liberal wing of the -- of Congress has been really opposed to some of the spending cuts that are on the table.

PALETTASo I think what the White House is hoping for is that a deal that they can sort of drive down the middle, that'll allow some -- you know, liberal Democrats and conservative Republicans would get enough support in the middle, you know, to get it through.

REHMScheherazade, what are you hearing about what's happening here in Washington? I know you've attended lots of dinners, lots of meetings. What are you hearing?

REHMANI'm hearing, generally, that the crisis would be so great. The default is so scary that they'll come together in the end. There will be a compromise. And I think for that reason, I believe that U.S. investors in particular are distracted now, obviously, because of the Aug. 2 deadline. I personally am much more worried about what's happening in Europe and what will happen tomorrow...

REHMI see.

REHMAN...because once the Aug. 2 deadline passes and if the Europeans muddle it up again tomorrow, the stress in Italy, the stress in all the other countries in the south are still going to be there. And it's a long-term stress.

REHMDo you believe that the Europeans feel the heat as much as members of Congress do sufficiently to get something moving?

REHMANOn the surface, it seems like they don't, but I'm sure they do. Angela Merkel is very calm at the moment, and she's meeting with the French president prior to the meeting tomorrow to sort out some kind of compromise between who's going to pay for what for the next bailout for Greece. Whether it's the investors or it's the banks taking a haircut or it's going to be Germany pulling in 40 percent of the bailout money, that's all being negotiated right now. And until the last 11th hour, we're not going to know.

REHMDamian.

PALETTASome of these issues, I'm sure listeners are saying, you know, trillions of dollars...

REHMYeah.

PALETTA...European debt markets, I mean, what does this have to do with me? But they're hearing this every day, you know, concern about the future, default on the debt. And I know that there's a lot of concern, that with the fragile recovery we're in right now, high unemployment, that a lot of consumers are just going to pull back. You know, we don't need a big vacation. We can't afford a new car. We're not going to remodel our kitchen.

PALETTAThis is not the time for us to be going out and spending, and it's that spending that's going to get the economy back on track. It's the consumers kind of plowing their money back into the economy. So the effect of this, all this discussion and concern and uncertainty is that, you know, we could see a contraction and growth in this country, and that could really make the matters even worse.

REHMNow, a number of people have called this program and said, what can we, as individuals, do to help get this Congress off the dime? What do you tell them?

PALETTAWell, that's a great question. And I -- you know, we -- the lawmakers I talk to, they tell me that their constituents all tell them to do kind of what they already decided they were going to do, right? So, I mean, obviously, no congressional district is made up of the exact same people. And we have seen more outreach from constituents to their lawmakers to try to push them in one direction or the other.

PALETTAAnd, quite frankly, that's the kind of thing that can get a lawmaker to act, you know, whether, you know, to take the more conservative position or the more liberal position, what they're hearing from their constituents. Because at the end of the day, they just want to get re-elected. And they have to do whatever their -- the voters tell them they're going to do.

REHMAnd this is where the political process mixes in with this very dangerous economic situation, Scheherazade.

REHMANYou know, there is a theory of inevitable compromise that's out there, which says that each party will give in at some point because, eventually, the voters will punish them if they do not. But there seems a sense in Washington, just until yesterday, that no one was really paying attention to the voters. It's a little bit too early.

REHMBut now?

REHMANBut now I think it's slightly changing.

PALETTAAnd we're starting to push this a little bit into the 2012 presidential election, right? I mean, the primaries are, you know, not that long into the future. And so voters are going to really be paying attention. This is going to be an issue that defines the 2012 presidential election, and I think everyone is very aware of that.

REHMDo you agree with that, Bill?

COHANYes, I do. And -- but I'm also continually struck, since the depth of the crisis in 2008, how little political outrage seems to get articulated by the citizenry of this country. I mean, if you look at what the policies of both the end of the Bush administration and the first few years of the Obama administration had been, they have been specifically designed to re-establish the status quo on Wall Street as quickly as possible, the thinking being that if Wall Street gets back on its feet, that somehow benefits will trickle down to the rest of us.

COHANAnd, you know, one way you can see that is in the Feds policies with, you know, QE1, QE2 and the potential for QE3, which means that interest rates will be kept very, very low. What does that mean? Well, there's two very, very serious and important consequences of that policy. One is that we have become, fortunately, a nation of savers again. People don't want to be as leveraged as they were. They're fearful of that.

COHANThey saw what happened when they had too much debt on their homes or their cars or whatever, and they've -- we've become more, again, of a nation of savers at the very moment when there's a huge penalty on savers. If you -- if anybody has looked at their checking account or savings account lately and they see the rates that they're getting, 0.01 or 0.02 percentage points, which is ridiculously low, and that is because the Fed has kept short-term interest rates and even longer term interest rates so low.

COHANSo, one, we're putting a huge tax on savers, i.e., the American people. You know, number two, we are giving a gift to Wall Street, firms like Goldman Sachs that can now back up to the Federal Reserve because they're bank holding companies and get money for, basically, zero cost and then invest that in treasury bills or treasury bonds and get a guaranteed profit. You know, again, it's benefiting the banks at the expense of the American taxpayers.

COHANAnd it's just extraordinary to me how little this message seems to be bubbling up from the citizenry to politicians in Washington. This needs to stop. It's not fair to the American people.

REHMAnd third? I thought you said you had three points.

COHANWell, I guess everything comes in three. But, you know, I guess, if I were to add a third point, it would be this, you know, ongoing high unemployment rate is -- as a result of fundamental shifts in our economy. You know, you see the way companies like Facebook, which is now valued at, crazily, at something like $100 billion, or any of these new social networking companies, like Groupon or Farmville or these companies that are going public now.

COHANThe incredible thing about these companies -- here you have a company like Facebook, which is worth something like $100 billion, which is beyond outrageous, has something like 2,500 employees. Well, they don't need employees anymore. They're not hiring because the whole business model of using the Internet to do their business doesn't require nearly as many employees as a manufacturing business.

COHANSo we've got, you know, structural and fundamental problems that the policies of the Fed and the fiscal -- and the U.S. government are not helping to ameliorate at the moment.

REHMScheherazade.

REHMANI think you talked about what the voters should be doing, and I'll tell you what they won't be doing. They won't be forgiving either party when it comes to the elections because the political wrangling going right now is costing them enormously. There is an interim cost every time there's indecision or there's a panic in the market.

REHMANLast Monday -- last week Monday, because the Europeans couldn't make up their minds, we lost $1 trillion worth of value in the stock market because of the drops all over the world. And this is coming on the heels of the middle class with job loss, retirement loss, the home values coming down. And, you know, every day there's a panic or there's a jitter, there's a loss.

REHMScheherazade Rehman, she is professor of international business and finance at George Washington University. We're going to take a short break. When we come back, we'll open the phones.

REHMWelcome back. Time to open the phones. Sorry to keep you waiting so long. Let's go first to Gene, who's in Miami, Fla. Good morning. You're on the air.

GENEGood morning, Diane. This is the first time I'm -- got into the show. I'm very happy to do that. I followed the discussion. I only have one short question. The banks cleared the problem, and they got bailed out. The consumers who want to spend money to grow the economy are being penalized. Is there anything the government can do, such as bail them out to, like, those who default, who has foreclosure, clear their credit so they can spend more money to grow the economy?

REHMWell, now, that is a question that has been asked again and again. William Cohan, is there anything the government can do for consumers?

COHANYes, there is. But it requires will, and it requires political agreement. I mean, it's extraordinary to me that basically -- I mean, there are some programs now that are designed to try to ameliorate this. But, basically, if you have a mortgage with your bank and you are having financial difficulties, you cannot go to the bank, except in unusual circumstances.

COHANYou cannot go to the bank and say to the bank, I would like to restructure my mortgage with you, maybe lower the interest rates or pay a little less but keep cash going to you, keep my mortgage current, keep things going on an even keel. You can't do that like you can -- like a corporation can do in bankruptcy court or even out of the bankruptcy court. Corporations are allowed to do that, but individuals are basically -- are not.

COHANAnd I don't know why that individuals who have mortgages, who have debts that they owe can't go to the people who they're borrowing from and try to renegotiate something that can get restructured. I mean, basically, the choices that people have now are either to keep current on their mortgages, you know, be in default and not pay anything and then suffer the consequences of...

REHMExactly.

COHAN...foreclosure and their house being taken away.

REHMAll right. Let's go to Bruce in Silver Spring, Md. Good morning.

BRUCEHello.

REHMHi.

BRUCEI think the time for arguing as to whether this default would cause irreparable harm to the economy or good is passed. I think the question really should be, can we afford to do this experiment? In other words, our -- if we're -- if default means blue skies and wonderful things, that's great. But if it's the opposite, we can't afford to even try that experiment. It's -- that's where the argument now should be, and that's where people should be writing their congressmen and women to say, no, we can't do this experiment.

REHMDamian.

PALETTAYou know, I think a lot of Americans agree with him, and the sentiment has really shifted in the last month. I think the majority of Americans now say, get this done, get this over with. We don't want to look into the abyss here.

REHMDo you think they were just laughing or standing back early on and just watching this?

PALETTANo. Actually, I think this issue is so confusing that when people were told about the debt ceiling, folks are saying, why would we want to get more debt for this country? You know, debt is the problem to begin with.

REHMYeah.

PALETTABut when you understand that the debt ceiling is really about money this country has already spent, already obligated, then it's not so easy. You can't just, you know, stop in your tracks.

PALETTAAll right. To John in Cleveland, Ohio. You're on the air.

JOHNGood morning, Ms. Rehm. I'd like to say a couple of my observations as well.

REHMSure.

JOHNFor our politicians, you have to remember, the Preamble of the Constitution states we are supposed to form a more perfect union, okay? That said, I would also like to suggest to all our politicians at every single level, please, read George Washington's farewell address. That is super insightful. If they read that, they wouldn't have ever gotten into this mess. From now, from years past, George Washington's farewell address.

JOHNBasically, a good economy is based on thrift, hands down. That's final, thrift. There was way too much opulence on Wall Street. There's too many people who have overextended themselves. I paid my house off. I'm middle class. And I work hard, and my wife works hard. And that's what we do. The Indian Parliament in India has at least one poor person on their parliament. I don't think we can say that here in America.

JOHNAnd, finally, if you want to invest, you have to invest in the world's children. That is paramount.

REHMAll right, sir. Thanks for calling. Bill Cohan, do you want to comment?

COHANWell, again, I think, you know, the caller's absolutely correct. You know, one of the things that we all look back sort of nostalgically now is, you know, is Tom Brokaw has written "The Greatest Generation" that pull your bootstraps up, that pull together a generation, you know, in and around the depression in World War II. We look back so fondly at that generation and with good reason because they were thrifty.

COHANThey worked hard. They -- you know, the concepts of sort of greed and hubris, which have, you know, filtered and are so much a part of our society every day now, were much reduced during those times.

COHANAnd I think, you know, we need to get back to spending within our means, to, you know, the great -- basically, the great question of our age is how do we grapple with a society that feels incredibly entitled with a treasury that is utterly restricted by, you know, as result of sort of foreign wars that were ill-advised or just profligate spending?

COHANAnd this is what we're grappling. That's what's going on in Wisconsin. That's what's going on in Washington. That's what this is all about. And we've got to come to terms with it. And one way to really come to terms with it is just start within ourselves to not be profligate in our own behavior.

REHMAll right. To Chesapeake, Va., and to David, thanks for waiting.

DAVIDSure. Hi. One thing I don't see really being talked about here is, you know, since Ronald Reagan, the GOP has reduced taxes tremendously. Reagan reduced taxes on the wealthy and the corporations from 70 percent down to 28 percent. Anytime you do that, that sets up a negative situation for your government budget.

DAVIDAnd, you know, and also the, you know, the GOP now -- the GOP that voted for -- the same GOP now that's trying to block everything is the same GOP that voted for seven debt ceiling increases during the Bush administration. Yet they seem to always evade responsibility for our economy. And, I mean, every Republican president since Reagan has brought down our economy, worse and worse and worse.

DAVIDAnd they say that, you know, the thing that they're doing is creating and stimulating jobs and what have you. But, really, all it's doing is creating quicker cash flow for the wealthy and big corporations and more tax savings and all that while giving a leg up to the middle class, like during the Bush administration for a little bit.

DAVIDBut then what happens? The economy falls. And all the rich and wealthy do is come back and take all of the gains that the middle class made and take ownership of the houses and property and everything else.

REHMAll right. Damian.

PALETTAWell, I -- he raises some interesting points. And one thing that we've watched, you know, this year, we're expected to have a $1.5 trillion deficit. And that seems like an enormous amount of money, and it is. And folks wonder how we got there. And the way we got there is by, you know, lowering taxes and raising spending, and the gap between spending and taxes gets wider.

PALETTABut it's really not the deficit now that has folks really concerned. It's the deficit and the debt in 10 years where healthcare costs are expected to skyrocket. The aging baby boomer population is going to put a lot more pressure on the entitlement programs. It's, you know, that down the road stuff that really has folks worried.

REHMBut now, this big package that's being talked about, this nearly $4 trillion package, does reduce Medicare, reduces Medicaid, reduces some of the loopholes, like what, Damian?

PALETTAWell, they're talking about getting about $1 trillion in new taxes just from really eliminating tax loopholes or modifying them.

REHMSuch as?

PALETTASuch as the mortgage interest deduction you have. Now, that'll still be there, but you're not going to be able to get as much credit for it.

REHMIn other words, depending on how high the price of your home is?

PALETTAExactly. Exactly. So they might -- and a lot of these things have to still be decided. But maybe, perhaps, you'll only be able to get an interest deduction if you have a $500,000 mortgage...

REHMRight.

PALETTA...or less.

REHMRight.

PALETTAAnd there's other tax breaks that they're looking at as well. For example, many corporate tax breaks, they want to limit or get rid of. And so in aggregate, that can add up to a lot of money.

REHMAnd what about Social Security, is that in the mix?

PALETTAAbsolutely. It's a really interesting piece because what they want to do is they want to -- Social Security is expected to run out of money in 2036. And they'll only be able to pay people what income that comes in this year. But they don't want to make cuts to Social Security to pay down the deficit 'cause that'll be very unpopular to voters.

PALETTASo what they want to do is bring in more revenue, essentially raise the tax people pay into Social Security, reduce the benefits. And then in the middle, you have a program that would be solvent for 75 years.

REHMScheherazade.

REHMANI think, you know, that there is a small silver lining in all of this, if you want to call it that. The U.S. debt crisis is really different than what's happening in the rest of the world, and particularly in Europe. Our debt ballooned significantly because of events. We had two wars, Iraq and Afghanistan, and we had a financial crisis.

REHMANAnd for us, political deadlock, if that's broken, we can manage our crisis. We can manage our debt. We can bring it down. The Europeans, unfortunately, can't do that. They simply don't have the money.

REHMSimply don't have the money.

REHMANThey have the classical developing country that probably borrowed too much, and they don't have the money to pay it back.

REHMSo where is it going to come from? How are they going to fix the various problems they have?

REHMANWell, right now, there's been a will to transfer from richer countries to poor countries with the IMF involved...

REHMRight.

REHMAN...which basically means the whole world is chipping in with their problems.

REHMOf course.

REHMANThis cannot go on endlessly.

REHMAnd Jim in Oklahoma City feels that something like that has gone on in this country. Jim, you're on the air.

JIMGood morning. Thank you for taking my call.

REHMSurely.

JIMOver the last 30 years, virtually all of the benefits from the growth of the economy in the United States has gone to the top 1 percent. My question is, to what extent is that redistribution of income upward responsible for the lack of the consumer demand that we're seeing now? And I'll take my answer off the air. Thank you.

REHMBill Cohan.

COHANI mean, there's no question, I mean, that the rich have been getting richer. We're into sort of a new Gilded Age for the people at the top of the pyramid. Again, I think that the policies at the end of the Bush administration, or during the Bush administration, and at the end and at the beginning of the Obama administration have continued to promulgate that behavior and that wealth transfer because, again, I think they've sort of bought into this whole Reaganomics of trickle-down economics.

COHANYou know, I noticed that even David Stockman, who was the Reagan budget director during the trickle-down economics heyday, has now come around and said that taxes should be raised on the wealthy.

COHANWhy, even in this Gang of Six compromise discussed yesterday, they're not talking about serious tax increases on the wealthy who have, you know, I think, are just out there waiting and expecting that taxes are going to be raised on them and, I think, really, frankly, want to do their part. They've realized they've had it so well for so long, and it's basically unfair -- and continued dichotomy between rich and poor.

COHANAnd I don't think it's -- it's probably never been worse as it's been lately. It's not going to be good for the fabric of our society. So I think, you know, we need to, you know, clearly, raise taxes on the wealthy, however you're defining that, and begin to redress some of this inequity in -- between rich and poor.

REHMAnd you're listening to "The Diane Rehm Show." Let's go to Hanover, N.H. Good morning, Phil.

PHILGood morning. I'm a priest in the Christian tradition, have been for 40 years. One of things I've noticed that this all has the tendency to be framed within the context of reducing expenses, government expenses at the expense of program, many of which are safety net kinds of programs. Some seem to suggest that it's the result of creeping socialism over the decades.

PHILBut, really, they're inspired by biblical ideas -- that is to say widows and orphans, single parents and children, the old honor your father and your mother, also taking care of those who are disabled -- and seeming to suggest that we substitute the belief that if you keep the rich richer and corporations, that that will eventually generate a stronger economy, which it hasn't, and that those needs will be provided for somehow, rather than taking as an important part of the dimension of a society, which claims to have some kind of tradition in this way, the values that are put forward by biblical ideas of taking care of the poor and the needy. I'm very concerned about the downward spiral, ethically, this whole discussion seems to imply.

REHMIt's a very interesting point, Damian.

PALETTAIt is really interesting. And, actually, what we saw when the Republicans proposed, you know, a major overhaul to Medicare that would change it as we know it, they got a lot of pushback 'cause Americans are really fond of some of these big programs for the older Americans, for the sick Americans, for disabled.

PALETTAAnd so I think what we've seen is a move in both parties to acknowledge we maybe not -- we can't dismantle these programs. But we just have to change, you know, the funding structure, the way money comes in and the way money goes out 'cause over the long term, like I mentioned over the next decade, they're just not financially sustainable.

PALETTAAnd so what we're looking at is making changes the way benefits are paid, the ways doctors are treated, the way health care is offered because I think by getting away from those, it's not really an ethical issue so much as a voter reaction issue. Voters don't want the politicians tinkering with their Social Security and Medicare.

REHMWell, but I do believe it's an ethical issue when you talk about Medicare and Medicaid, which is even a bigger problem for how this whole thing gets solved. I think that Phil's point is one that's shared by a great many people around this country in the hopes that this Congress will finally come to some reasonable solution. I'm predicting they will. What do you say, Damian?

PALETTAI think they will, although I think they're going to cut it a little closer than a lot of folks want.

REHMScheherazade, what do you think?

REHMANI think they will.

REHMAnd, Bill, finally one word.

COHANThey had better.

REHMThat was three. I thank you all so much. Bill Cohan, former investment banker, author of "Money and Power: How Goldman Sachs Came to Rule the World," Scheherazade Rehman at George Washington University, Damian Paletta of The Wall Street Journal, thank you so much.

PALETTAThank you.

REHMANThank you.

REHMThanks for listening, all. I'm Diane Rehm.